Manager due diligence is frequently treated as a search for outperformance. Advisers and investment committees review performance track records, assess alpha generation, and evaluate managers on their ability to beat benchmarks. In a well-governed mandate, however, manager selection is primarily a risk management function. The distinction matters significantly in practice.
This is not an argument against seeking capable managers. It is an argument for the correct framing of what manager selection is trying to achieve within a structured investment framework. When manager selection is framed as a performance chase, it tends to produce decisions that are backward-looking, cyclically biased, and disconnected from the mandate’s actual objectives.
What manager selection is actually for
In a multi-asset mandate built on a defined strategic asset allocation, each asset class allocation must be accessed through some implementation vehicle, whether that is an ETF, a pooled fund, or a directly managed account. Manager selection is the process of choosing that implementation vehicle. The primary question is not which manager has performed best over the past three years. It is which vehicle most efficiently delivers the risk and return characteristics of the target asset class, within the cost, liquidity, and operational parameters of the mandate.
This framing produces a materially different due diligence process. The analysis focuses on fee efficiency, tracking quality, liquidity terms, operational robustness, and the manager’s investment philosophy and its consistency with the mandate. Performance is reviewed, but in the context of whether it is consistent with the mandate’s risk and return expectations, not as a ranking exercise.
The primary question is not which manager has performed best over the past three years. It is which vehicle most efficiently delivers the target asset class characteristics.
The governance framework for manager oversight
Once managers are selected, ongoing monitoring must be structured around the same governance principles. Managers are reviewed against the criteria that drove their selection, not against a moving performance benchmark. Underperformance relative to peers, in isolation, is not sufficient grounds for replacement if the manager is delivering the asset class exposure the mandate requires and operating within the expected risk parameters.
Manager changes are governance decisions. They should be made through the investment committee process, with documented rationale, and with consideration of the transaction costs and portfolio disruption associated with a change. Reactive manager changes driven by short-term performance are inconsistent with the long-term, mandate-focused approach that good investment governance requires.
ESG and values-based considerations
For trustees, charities, and iwi organisations with explicit ethical or values-based mandates, manager selection must also assess alignment with those values. This is not a secondary consideration. It is a mandate requirement. The due diligence process must include evaluation of the manager’s ESG integration approach, their exclusion policies, and their ability to report on values alignment consistently and transparently.
GoCIO incorporates ethical alignment assessment as a standard component of manager due diligence for mandates where this is relevant. The IPS defines the ethical parameters, and manager selection and monitoring are assessed against those parameters as a primary criterion.
The connection to audit-readiness
A manager selection process grounded in governance discipline produces documentation that is inherently audit-ready. The rationale for each selection is recorded. The ongoing monitoring framework is defined. Changes are documented with clear rationale. This is the standard that both the FMA and trustee beneficiaries are increasingly expecting to see evidenced.